Investment Valuation - 3rd Edition
This web site is designed to support "Investment Valuation", the third edition. The publisher is John Wiley and Sons. You can navigate the site by either going to individual chapters and getting supporting material by chapter, or by going to the supporting material directly. The supporting material includes:

  1. Chapter Outlines and overheads: These are saved as pdf files, and you need Adobe Acrobat to read them. You can download Adobe Acrobat by going to the Adobe site. (www.adobe.com) The overheads are categorized by topic, rather than chapter. To go to overheads, click here.
  2. Derivations and Discussion: These represent interesting questions that often come up in the context of the specified topic, with discussions and analyses.
  3. Readings: These are readings from business and academic publications that supplement the specific topic.
  4. Solutions: The solutions to each chapter are at the end of each chapter in the web site below.
  5. Powerpoint Presentations: These are power point presentations that are designed for use by instructors. You will need the password to download these as well.
  6. Spreadsheets: These are spreadsheets that supplement the topic. They are in Microsoft Excel, and can be used on either a Mac or Windows system.
  7. Datasets: These are useful datasets to supplement each chapter. They generally include industry averages for key variables and represent updates on many of the tables in the book.
  8. Web Casts: These are webcasts of the lectures from the valuation class that I teach at Stern. You can use the lecture notes and the text book to follow the lectures.

You can read the preface to the book by clicking here. If you are an instructor using this book, click here .

Since this is the first printing of this edition, there will undoubtedly be typos that have crept in. The corrections can be found here. If you find other errors, please let me know.

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Chapter 25 Chapter 26 Chapter 27 Chapter 28 Chapter 29 Chapter 30
Chapter 31 Chapter 32 Chapter 33 Chapter 34 Chapter 35  

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Spreadsheets Overheads (pdf versions of slides) Datasets References
Solutions Derivations and Discussion Web Casts  

Chapter 1: Introduction to Valuation
Topic Details
Overheads
Estimation Issues and Questions
  1. How do you keep bias out of your valuation?
  2. What is the cost of having more detail in valuations?
Solutions to Problems Download as pdf file
Readings
  1. The Rise of Jack Grubman
  2. The Fall of Jack Grubman
  3. Wall Street's Hype Machine
  4. A Sage on Enron?

Chapter 2: Approaches to Valuation
Topic Details
Overheads Download as pdf file
Illustrations Illustration 2.1: Effects of mismatching cashflows and discount rates
Illustration 2.2. The potential for misuse with comparable firms
Data Sets
Spreadsheets
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Is there an easy way to tell if a cashflow is an equity cashflow or a firm cashflow?
  2. What is the difference, if any, between discounted cashflow and asset based valuation?
Readings
  1. Valuation Basics (courtesy of the Motley Fool)
  2. Why don't they teach you to invest like Warren Buffett?
  3. An open letter to Warren Buffett (from a non-admirer)

Chapter 3: Understanding Financial Statements

Topic Details
Overheads Download as pdf file
Illustrations

Illustration 3.1: Asset Values for Boeing and the Home Depot
Illustration 3.2: Measuring Liabilities and Equity: Boeing and the Home Depot
Illustration 3.3: Measures of Earnings
Illustration 3.4: Estimating Return on Capital
Illustration 3.5: ROE Computations
Illustration 3.6: Interest and Fixed Charge Coverage Ratios
Illustration 3.7: Book Value Debt Ratios and Variants- Boeing and Home Depot

Data Sets mgnroc.xls: Operating margins, turnover ratios and returns on capital of firms in the United States, classified by industry.
rocroe.xls: Return on capital, debt equity ratios, book interest rates and returns on equity of firms in the United States, classified by industry.
wcdata.xls: Working capital ratios for firms in the United States, classified by industry.
covratio.xls: Interest coverage and fixed charge coverage ratios for firms in the United States, classified by industry.
dbtfund.xls: Book value debt ratios and market value debt ratios for firms in the United States, classified by industry.
Spreadsheets finratio.xls: Compute the profitability ratios for a firm, based upon financial statement data.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How different are accounting rules in different countries?
  2. How do you value a company when you do not trust the accounting statements?
Readings
  1. Measuring Earnings
  2. The Content of an Annual Report
  3. Low Points in Accounting History
  4. Operating Leases as Debt

Chapter 4: The Basics of Risk
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 4.1: Calculation of standard deviation using historical returns: Boeing and the Home Depot

Data Sets

optvar.xls: There is a dataset on the web that summarizes standard deviations and variances of stocks in various sectors in the United States
ratingfins.xls: There is a dataset on the web that summarizes key financial ratios by bond rating class for the United States in the most recent period for which the data is available.

Spreadsheets  
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Why is the marginal investor assumed to be diversified?
  2. How do I estimate historical standard deviations and variances?
  3. How about correlations and covariances?
Readings
  1. Operating Risk as a Measure of Risk
  2. Market Risk and Time Horizon
  3. Investors must recall risk
  4. New Definitions of Risk
  5. Diversification matters
  6. Can you diversify and pick stocks at the same time?
  7. What makes your stock price go up or down?

Chapter 5: Option Pricing Theory and Models
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 5.1: Binomial Option Valuation
Illustration 5.2: Valuing an option using the Black-Scholes Model
Illustration 5.3: Valuing a short-term option with dividend adjustments – The Black Scholes Correction
Illustration 5.4: Valuing a long term option with dividend adjustments - Leaps
Illustration 5.5: Using Pseudo-American option valuation to adjust for early exercise
Illustration 5.6: Valuing a warrant with dilution
Illustration 5.7: Valuing a warrant on Avatek Corporation
Illustration 5.8: Valuing a put using put-call parity: Cisco & AT&T

Data Sets optvar.xls: There is a dataset on the web that summarizes standard deviations and variances of stocks in various sectors in the United States
Spreadsheets optst.xls: This spreadsheet allows you to estimate the value of a short term option, when the expected dividends during the option life can be estimated.
optlt.xls: This spreadsheet allows you to estimate the value of an option, when the underlying asset has a constant dividend yield.
bstobin.xls: This spreadsheet allows you to estimate the parameters for a binomial model from the inputs to a Black-Scholes model.
warrant.xls: This spreadsheet allows you to estimate the value of an option, when there is a potential dilution from exercise.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do I make sure that the inputs to the Black-Scholes model are consistent?
  2. Will the Black-Scholes and Binomial models give me different values and why?
Readings  

Chapter 6: Market Efficiency - Definition, Tests and Evidence
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 6.1: Example of an event study - Effects of Option Listing on Stock prices
Illustration 6.2: Example of a portfolio study - Price Earnings Ratios

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets  
Spreadsheets  
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do my views on market efficiency affect how I approach valuation?
Readings
  1. Survival bias in mutual fund performance
  2. Bogle on picking mutual funds
  3. Crazy market is tough to beat...
  4. Dumb Investors, Smart Markets
  5. A New Paradigm for Markets?

Chapter 7: Riskless Rates and Risk Premiums

Topic  Details
Overheads Download as pdf file
Illustrations

 

Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets histretSP.xls: Summarizes historical returns on stocks, T.Bonds and T.Bills going back to 1926.
ratings.xls: This dataset includes default spreads for bonds in different ratings classes.
ctryprem.xls: Contains the updated ratings for countries and the risk premiums associated with each.
histimpl.xls: Shows the inputs used to calculate the premium in each year for the U.S. market.
Spreadsheets implprem.xls: This spreadsheet allows you to estimate the implied equity premium in a market.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Should I use the government bond rate of the country where my firm is located as my riskfree rate?
  2. What if I have a firm with operations in different countires and cashflows in different currencies?
  3. What if the government bond rate of the currency (of my company’s cashflows) includes default risk?
  4. When would I use the arithmetic average risk premium (as opposed to the geometric risk premium)?
  5. Why is the historical premium so much higher than the implied premium in the United States?
Readings
  1. Risk Premium in Emerging Markets
  2. Classic Rule of Risk Premium under Attack
  3. Are risk premiums too low? (Greenspan testimony)
  4. Historical Risk premiums: A reexamination

Chapter 8: Estimating Risk Parameters and Costs of Financing
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 8.1: Estimating a Regression Beta for Boeing
Illustration 8.2: Estimating a Beta for Titan Cements

Illustration 8.3: Effects of Leverage on betas: Boeing
Illustration 8.4: Estimating a Bottom-up Beta for Vans Shoes – January 2001
Illustration 8.5: Estimating a Bottom-up Beta for Boeing: September 2000
Illustration 8.6: Estimating a Bottom-up Beta for Titan Cements – January 2000
Illustration 8.7: Beta of a Firm After an Acquisition: Boeing and McDonnell Douglas
Illustration 8.8: Estimating Accounting Betas ––Defense Division of Boeing - 1995
Illustration 8.9: Estimating the Cost of Equity for Boeing – June 2000
Illustration 8.10: Estimating the Cost of Equity for Embraer – March 2008
Illustration 8.11: Estimating the Cost of Debt: Boeing in December 2000
Illustration 8.12: Estimating the Cost of Debt: Embraer in March 2008
Illustration 8.13: Calculating the Cost Of Preferred Stock: Ford
Illustration 8.14: Breaking down a convertible bond into debt and equity components: MGM
Illustration 8.15: The Debt Value of Operating Leases: Boeing in December 2000
Illustration 8.16: Difference between market value and book value debt ratios – Boeing in June 2000
Illustration 8.17: Estimating Cost of Capital - Boeing
Illustration 8.18: Estimating Cost of Capital – Embraer in March 2008

Data Sets betas.xls: Updated betas and unlevered betas by business sector in the United States.
spearn.xls: Earnings changes, by year, for the S&P 500 going back to 1960.
wacc.xls: Costs of debt, costs of equity, debt ratios and costs of capital, by industry group, for firms in the United States.
Spreadsheets accbeta.xls: Estimate the accounting beta on a division or firm.
risk.xls.Run a regression of stock returns against market returns and estimate risk parameters.
levbeta.xls.Estimate the unlevered beta for a firm and compute the betas as a function of the leverage of the firm.
ratings.xls: This spreadsheet allows you to estimate the synthetic rating and cost of debt for any firm.
oplease.xls: This spreadsheet allows you to convert operating lease expenses into debt.
wacccalc.xls: This spreadsheet allows you to convert book values of debt into market values.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. When can I use the regression beta as my estimate of beta in a valuation?
  2. When estimating bottom-up betas by looking at comparable firms, how should I define comparable firms?
  3. Should I adjust the beta for a firm's size or other characteristics?
  4. Can I use the yield to maturity on a bond issued by the company as the cost of debt?
  5. If I have an actual rating, do I need to even estimate a synthetic rating?
  6. How can I build a more complete model for estimating ratings?
  7. Can I use book value of debt as a proxy for market value of debt?
  8. What should be in my market value of equity?
Readings
  1. A contrary view on betas
  2. Margin of Safety.. An alternative to beta?

Chapter 9: Measuring Earnings
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 9.1: Updated Earnings for Apple: April 2011
Illustration 9.2: Capitalizing R&D expenses: Amgen in March 2009
Illustration 9.3: Should you capitalize SG&A expense? Analyzing Amazon.com
Illustration 9.4: Capitalizing Recruitment and Training Expenses: Cyber Health Consulting
Illustration 9.5: Adjusting Operating Income for Operating Leases: The Gap in 2011
Illustration 9.6: Adjusting Earnings for One-time Charges

Data Sets  
Spreadsheets R&Dconv.xls: This spreadsheet allows you to convert R&D expenses from operating to capital expenses.
oplease.xls: This spreadsheet allows you to convert operating lease expenses into debt.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do you know if a one-time charge or income is truly one time?
Readings
  1. R& D's effects on earnings
  2. Smoothing Earnings
  3. Is this debt?
  4. One-time Write off?
  5. The Accounting Black Box
  6. The Practices of Five Companies: GE, Coke, AIG, Williams and IBM
  7. Warnings Signs in Earnings Reports

Chapter 10: From Earnings to Cashflows
Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 10.1: Effect of Tax Rate assumptions on value
Illustration 10.2: The Effect of Net Operating Loss on Value- Tesla
Illustration 10.3: Tax Benefit from Expensing: Amgen in 2011
Illustration 10.4: Estimating Normalized Net Capital Expenditures– Reliance India
Illustration 10.5: Effect of Capitalizing R&D: Amgen
Illustration 10.6: Estimating Net Capital Expenditures: Cisco in 1999
Illustration 10.7: Working Capital versus Non-cash Working Capital – Marks and Spencer
Illustration 10.8: Estimating Non-cash Working Capital Needs – The Gap

Data Sets

taxrate.xls: There is a dataset on the web that summarizes average effective tax rates by industry group in the United States for the most recent quarter.
wcdata.xls: There is a dataset on the web that summarizes non-cash working capital needs by industry group in the United States for the most recent quarter.
capex.xls: Summarizes capital expenditures as a percent of depreciation, by industry group.

Spreadsheets  
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. When would you include cash in working capital to compute cash flows?
  2. What marginal tax rate do you use when you have a firm that operates in multiple countries (with different tax rates)?
  3. What will happen to value if you ignore acquisitions when estimating capital expenditures?
Readings
  1. Accounting versus Cash Earnings
  2. Off Balance Sheet Items?
  3. Special Purpose Entities

Chapter 11: Estimating Earnings Growth

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 11.1: Differences between Arithmetic and Geometric Averages: Motorola
Illustration 11.2: Linear and Log-linear models of growth: General Electric.
Illustration 11.3: Negative Earnings: Tesla and Aracruz Celulose
Illustration 11.4: Cisco: Earnings Growth and Size of the Firm
Illustration 11.5: Growth in Earnings Per Share
Illustration 11.6: Growth in Net Income
Illustration 11.7: Breaking down Return on Equity
Illustration 11.8: Effects of Changing Return on Equity: Con Ed
Illustration 11.9: Measuring the Reinvestment Rate, Return on Capital and Expected Growth Rate – Tata Motors
Illustration 11.10: Normalizing Reinvestment Rate and Return on Capital: Tata Motors
Illustration 11.11: Estimating Expected Growth with Changing Return on Capital: Titan Cement and Motorola
Illustration 11.12: Estimating Revenues: Tesla and Linkedin
Illustration 11.13: Estimating Operating Margins:Tesla and Linkedin
Illustration 11.14: Estimated Sales to Capital Ratios:Tesla and Linkedin

Data Sets histgr.xls: There is a dataset on the web that summarizes historical growth rates in earnings and revenues by industry group for the United States.
fundgrEB.xls: There is a dataset on the web that summarizes reinvestment rates and return on capital by industry group in the United States for the most recent quarter.
margins.xls: This dataset on the web summarizes operating margins, by industry, for the United States.
Spreadsheets chgrowth.xls: This spreadsheet allows you to estimate the expected growth rate in operating income for a firm where the return on capital is expected to change over time.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Why might analyst estimates of growth deviate from the fundamental growth rate?
  2. Can you use historical, analyst and fundamental growth rates in the same valuation?
  3. Can the fundamental growth rate be negative?
Readings
  1. The inside of earnings growth in the 1990s
  2. Evaluating analyst growth estimates
  3. Return on Capital, not growth....

Chapter 12: Closure in Valuation: Estimating Terminal Value

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 12.1: Length of High Growth Period
Illustration 12.2: Stable Growth rates and Excess Returns
Illustration 12.3: Stable Growth Inputs for P&G, Coca Cola and Amgen
Illustration 12.4: Choosing a Growth Pattern

Data Sets betas.xls: This dataset on the web summarizes the average levered and unlevered betas, by industry group, for firms in the United States.
eva.xls: This dataset on the web summarizes the returns on capital (equity), costs of capital (equity) and excess returns, by industry group, for firms in the United States.
wacc.xls: This dataset on the web summarizes the debt ratios and costs of debt, by industry group, for firms in the United States.
divfund.xls: This dataset on the web summarizes retention ratios, by industry group, for firms in the United States.
capex.xls: This dataset on the web summarizes the reinvestment rates, by industry group, for firms in the United States.
Spreadsheets impliedROC.xls: Solves for the return on capital implied in terminal value assumptions about growth and reinvestment.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Can I use a growth rate higher than the growth rate of the economy as my stable growth rate if my firm is a well-managed firm or if it has other stellar qualities?
  2. When would you use liquidation value instead of terminal value?
  3. How do you estimate terminal multiples from fundamentals?
Readings
  1. Competitive Advantage Period

Chapter 13: Dividend Discount Models

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 13.1: Value a regulated firm: Consolidated Edison in 2011
Illustration 13.2: Value a company with stable growth DDM: Total SA
Illustration 13.3: Valuing a firm with the two-stage dividend discount model: Procter & Gamble
Illustration 13.4: Valuing a firm with modified dividend discount mode: Procter & Gamble
Illustration 13.5: Valuing the S&P 500 using a dividend discount model & augmented dividend discount model: January 1, 2011
Illustration 13.6: The Value of Growth: P&G
Illustration 13.7: Valuing with the H model: Vodafone
Illustration 13.8: Valuing with the Three-stage DDM model: Coca Cola

Data Sets divfund.xls: This dataset on the web summarizes retention ratios, by industry group, for firms in the United States.
Spreadsheets

DDMst.xls: This spreadsheet allows you to value a stable growth firm, with stable firm characteristics (beta and retun on equity) and dividends that roughly match cash flows.
DDM2st.xls: This spreadsheet allows you to value a firm with a temporary period of high earnings followed by stable growth.
DDMH.xls: This spreadsheet allows you to use the H model to value a stock.
DDM3st.xls: This spreadsheet allows you to value a firm with a period of high growth followed by a transition period where growth declines to a stable growth rate.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Can you value stocks that do not pay dividends with the dividend discount model?
  2. How do you allow for stock buybacks in the dividend discount models?
  3. How does the personal taxation of dividends affect the value of a share?
Readings
  1. The Dividend Discount Model
  2. The dividend yield matters....

Chapter 14: Free Cashflow to Equity Discount Models

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 14.1: Estimating Free Cash Flows to Equity – Disney
Illustration 14.2: FCFE Stable Growth Model: Volkswagen
Illustration 14.3: Capital Expenditure, Depreciation and Growth Rates
Illustration 14.4: Two-Stage FCFE Model: Nestle
Illustration 14.5: Three Stage FCFE Model: Tsingtao Breweries (China)
Illustration 14.6: Comparing the DDM and FCFE Models: Coca Cola

Data Sets divfcfe.xls: There is a dataset on the web that summarizes dividends, cash returned to stockholders and free cash flows to equity, by sector, in the United States.
Spreadsheets dividends.xls: This spreadsheet allows you to estimate the free cash flow to equity and the cash returned to stockholders for a period of up to 10 years
FCFEst.xls: This spreadsheet allows you to value the equity in a firm in stable growth, with all of the inputs of a stable growth firm
FCFE2st..xls: This spreadsheet allows you to value a firm with a temporary period of high growth in FCFE, followed by stable growth
FCFE3st..xls: This spreadsheet allows you to value a firm with a temporary period of high growth in FCFE, followed by a transition period, followed by stable growth
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Why do firms not pay out their free cashflow to equity as dividends?
  2. What is the link between corporate governance and the use of FCFE models?
Readings
  1. Microsoft faces a call to pay dividends

Chapter 15: Valuing a Firm: Free Cashflow to Firm and APV Models

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 15.1: Valuing a firm with a stable growth FCFF Model: Telesp
Illustration 15.2: Valuing Target: Dealing with Operating Leases (compare to no lease adjustment value)
Illustration 15.3: Valuing Amgen: Effects of R&D (compare to no R&D adjustment)
Illustration 15.4: Valuing Gerdau Steel: Dealing with Country Risk
Illustration 15.5: Valuing a firm with the APV approach: J. Crew
Illustration 15.6: WACC, Firm Value, and Leverage
Illustration 15.7: Analyzing the Capital Structure for Disney – March 2009
Illustration 15.8: Using the Adjusted Present Value Approach to calculate Optimal Debt Ratio for Disney in 2009

Data Sets betas.xls: Updated betas and unlevered betas by business sector in the United States.
ratings.xls: This dataset includes default spreads for bonds in different ratings classes.
wacc.xls: Costs of debt, costs of equity, debt ratios and costs of capital, by industry group, for firms in the United States.
Spreadsheets

fcffginzu.xls: This spreadsheet allows you to estimate the value of a firm using the FCFF approach.
fcffvsfcfe.xls: This spreadsheet allows you to compare the equity values obtained using FCFF and FCFE models
captstr.xls: This spreadsheet allows you to compute the optimal debt ratio firm value for any firm, using the same information used for Boeing. It has updated interest coverage ratios and default spreads built in
apv.xls: This spreadsheet allows you to compute the value of a firm, with leverage, using the adjusted present value approach

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. What is the key difference between the cost of capital and APV approaches?
  2. When is it more appropriate to use the APV approach to value firms?
Readings
  1. Adjusted Present Value with growth and changing cost of capital

Chapter 16: Estimating Equity Value Per Share

Topic  Details
Overheads Download as pdf file
Illustrations Illustration 16.1: Consolidated versus Separate Valuation
Illustration 16.2: Cash Invested at below market rates
Illustration 16.3: Discount for Poor Investments in the Future
Illustration 16.4: Microsoft’s cash and marketable securities
Illustration 16.5: Valuing a closed-end fund
Illustration 16.6: Valuing Holdings in other company
Illustration 16.7: Fully Diluted Approach to estimating Value per Share: Cisco
Illustration 16.8: Treasury Stock Approach: Cisco
Illustration 16.9: Option Value Approach: Cisco
Answers to Concept Checks/ Critical Thinking

Concept Checks
Critical Thinking

Data Sets cash.xls: There is a dataset on the web that summarizes the value of cash and marketable securities by industry group in the United States for the most recent quarter.
Spreadsheets warrants.xls: This spreadsheet allows you to value the options outstanding in a firm, allowing for the dilution effect.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do you value holdings of private companies?
  2. What do you do about minority interests?
  3. How is the valuation of executive stock options different from the valuation of other options?
Readings
  1. Option backlash at companies
  2. Options at dot.com firms
  3. The Value of Transparency

Chapter 17: Fundamental Principles of Relative Valuation

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 17.1: Comparing PE ratios and growth rates across firms: Beverage Companies
Illustration 17.2: Revisiting the Beverage Sector: Sector Regression

Data Sets  
Spreadsheets  
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Do you make fewer assumptions when you use multiples than when you do discounted cashflow valuation?
Readings  

Chapter 18: Earnings Multiples

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 18.1: Estimating the PE ratio for a high growth firm in the two-stage model
Illustration 18.2: Estimating a Fundamental PE ratio
Illustration 18.3: PE Ratios across time
Illustration 18.4: PE Ratios across time for the S&P 500
Illustration 18.5: PE Ratios in markets with different fundamentals
Illustration 18.6: Comparing PE ratios across markets
Illustration 18.7: An Example with Emerging Markets
Illustration 18.8: Comparing PE ratios for Global telecomm firms
Illustration 18.9: Valuing Procter and Gamble using the market regression
Illustration 18.10: Estimating the PEG ratio for a firm
Illustration 18.11: Estimating and Using the PEG ratio for Data Networking firms
Illustration 18.12: Comparing Relative PE ratios for automobile stocks
Illustration 18.13: Analyzing Amilyn Pharmaceuticals using Forward PE

Illustration 18.14: Estimating Value to EBITDA with cross holdings
Illustration 18.15: Analyzing Value to EBITDA multiples
Illustration 18.16: Comparing the Value to EBITDA Multiple: Steel companies

Data Sets pedata.xls: There is a dataset on the web that summarizes price earnings ratios and fundamentals by industry group in the United States for the most recent year
vebitda.xls: There is a dataset on the web that summarizes value to earnings multiples and fundamentals by industry group in the United States for the most recent year
Spreadsheets eqmult.xls: This spreadsheet allows you to estimate the price earnings ratio for a stable growth or high growth firm, given its fundamentals.
firmmult.xls: This spreadsheet allows you to estimate firm value multiples for a stable growth or high growth firm, given its fundamentals.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do outstanding options affect PE ratio comparisons?
  2. Should you look at earnings before or after extraordinary items?
  3. Where do rules of thumb (say 8 times EBITDA) come from?
Readings
  1. Malkiel on PE ratios
  2. Interest rates and PE ratios
  3. PE ratios with R&D
  4. Motley Fool on PEG ratios

Chapter 19: Book Value Multiples

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 19.1: Estimating the PBV ratio for a stable firm
Illustration 19.2: Estimating the price-book value ratio for a 'privatization' candidate - Jenapharm (Germany)
Illustration 19.3: Estimating the PBV ratio for a high growth firm in the two-stage model
Illustration 19.4: Estimating the Price/Book Value Ratio for a high growth firm using FCFE - Nestle
Illustration 19.5: Return on Equity and Price-Book Value
Illustration 19.6: Comparing Price to Book Value Ratios: Integrated Oil companies
Illustration 19.7: Valuing a firm using the cross-sectional regression
Illustration 19.8: ROE and P/BV Ratios - The case of IBM

Data Sets pbvdata.xls: There is a dataset on the web that summarizes price to book and value to book multiples and fundamentals by industry group in the United States for the most recent year
Spreadsheets eqmult.xls: This spreadsheet allows you to estimate the price to book ratio for a stable growth or high growth firm, given its fundamentals.
firmmult.xls: This spreadsheet allows you to estimate firm value multiples for a stable growth or high growth firm, given its fundamentals.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do stock buybacks affect price to book ratios?
  2. When do price to book ratios and value to book ratios convey the most information?
Readings
  1. Price to Book Value Bargains

Chapter 20: Revenue and Sector-specific Multiples

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 20.1: Estimating the PS ratio for a high growth firm in the two-stage model
Illustration 20.2: Estimating the price to sales ratio for Whole Foods
Illustration 20.3: Estimating the EV to sales ratio for Coca Cola
Illustration 20.4: Estimating the effect of lower margins of price-sales ratios
Illustration 20.5: Choosing between a high-margin and a low-margin strategy.
Illustration 20.6: Examining the effects of moving to a lower-margin, higher volume strategy: Whole Foods
Illustration 20.7: Valuing a brand name using value-sales ratio
Illustration 20.8: Valuing a brand name: The Coca Cola Example
Illustration 20.9: Revenue Multiples and Margins: Specialty Retailers
Illustration 20.10: Revenue Multiples and Margins: Internet Retailers
Illustration 20.11: Regression Approach – Specialty Retailers
Illustration 20.12: Regression Approach – Internet Retailers
Illustration 20.13: Price to Sales ratio in a sector across time
Illustration 20.14: Valuing firms using Market Regression
Illustration 20.15: Estimating the Value per Subscriber: Internet Portal
Illustration 20.16: Comparing Value per Member: Social Media companies

Data Sets psdata.xls: There is a dataset on the web that summarizes price to sales and value to sales ratios and fundamentals by industry group in the United States for the most recent year.
Spreadsheets eqmult.xls: This spreadsheet allows you to estimate the price to sales ratio for a stable growth or high growth firm, given its fundamentals.
firmmult.xls: This spreadsheet allows you to estimate firm value multiples for a stable growth or high growth firm, given its fundamentals.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. What is the argument for using sector-specific multiples?
  2. When do sector-specific multiples work best?
Readings
  1. Value per customer? An analysis of Amazon's value
  2. Value to Vision? A New Ratio

Chapter 21: Valuing Financial Services Firms

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 21.1: Stable Growth Dividend Discount Model
Illustration 21.2: A High Growth Dividend Discount Model – State Bank of India
Illustration 21.3: Valuing a bank with a FCFE model
Illustration 21.4: Excess Return Valuation – Goldman Sachs
Illustration 21.5: Comparing PE ratios: Insurance Companies
Illustration 21.6: Earnings Multiples for Business: JPM Chase
Illustration 21.7: Price to Book Value Ratios: European Banks

Data Sets  
Spreadsheets eqexret.xls: Estimates the value of a financial service firm from the expected excess returns in the future.
Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do you factor in regulatory constraints and rules into the value of a bank or financial service firm?
  2. How does the quality of a bank's loan get reflected in its value?
Readings
  1. Creative Accounting at Banks

Chapter 22: Valuing Firms with Negative Earnings

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 22.1: Normalizing Earnings for a Firm after a Poor Year: Daimler Benz in 1995
Illustration 22.2: Valuing a cyclical firm during a recession – adjusting the growth rate: Dana Corp in 2011
Illustration 22.3: Normalizing Earnings for a Cyclical Firm in a Recession: Historical Margin
Illustration 22.4: Valuing a Cyclical Company: Toyota
Illustration 22.5: Valuing a Commodity Company: Exxon Mobil
Illustration 22.6: Valuing a privatization – CVRD
Illustration 22.7: Adjust debt ratio over time: Hyundai
Illustration 22.8: Valuing a company with negative earnings & default risk: MGM & MGM default probability

Data Sets

dbtfund.xls: There is a dataset on the web that summarizes book and market value debt ratios by industry group in the United States for the most recent year

Spreadsheets

normearn.xls: This spreadsheet allows you to normalize the earnings for a firm, using a variety of approaches
distress.xls: Estimates the probability that a firm will cease existence as a going concern - i.e. the probability of distress.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do you differentiate between earnings drops that are temporary and those that are long-term?
  2. How do you assess the probability of bankruptcy?
  3. How do you estimate distress value?
Readings
  1. Warning signs of distress
  2. Valuing Distressed Firms

Chapter 23: Valuing Young and Start-up Firms

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 23.1: Estimating Revenue Growth: Tesla
Illustration 23.2: Estimating Margin & Path to Margin: Tesla
Illustration 23.3: Estimating Reinvestment Needs: Tesla
Illustration 23.4: Estimating Risk Parameters and Costs of Capital: Tesla
Illustration 23.5: Estimating Firm Value: Tesla
Illustration 23.6: Valuing Equity per Share: Tesla
Illustration 23.7: Value Drivers for Tesla

Data Sets

 

Spreadsheets

higrowth.xls: Values a high growth firm, based on revenue growth and target margins.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do you estimate revenue growth in future years for a young firm with no history?
  2. How do you consider the possibility that a young firm may not survive?
Readings
  1. Six Myths about the valuation of technology companies

Chapter 24: Valuing Private Firms

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 24.1: Estimating Accounting Betas –– InfoSoft
Illustration 24.2: Estimating a Fundamental Beta: InfoSoft
Illustration 24.3: Estimating bottom-up betas – Chez Pierre and InfoSoft
Illustration 24.4: Adjusting bottom-up beta for non-diversification
Illustration 24.5: Estimating Cost of Debt: Chez Pierre and Infosoft
Illustration 24.6: Estimating Cost of Capital: Chez Pierre and Infosoft
Illustration 24.7: Estimating Operating Income: Chez Pierre and Infosoft
Illustration 24.8: Estimating Growth: Chez Pierre and Infosoft
Illustration 24.9: Closure in Valuation and Terminal Values: Chez Pierre and Infosoft
Illustration 24.10: Estimating the Illiquidity Discount for Chez Pierre
Illustration 24.11: Valuing Chez Pierre for sale
Illustration 24.12: Valuing Infosoft
Illustration 24.13: Valuing voting & Non-voting shares for InfoSoft
Illustration 24.14: Valuing a Private Equity Stake

Data Sets  
Spreadsheets

liqdisc.xls: This spreadsheet allows you to estimate the illiquidity discount on a private firm.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How can a private business owner maximize the value of the business for sale?
Readings Restricted stock discounts

Chapter 25: Acquisitions and Takeovers

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 25.1: A Status Quo Valuation of Digital
Illustration 25.2: The Value of Control at Digital
Illustration 25.3: Valuing Synergy: Compaq and Digital
Illustration 25.4: Tax Benefits of writing up Asset Values after Takeover: Congoleum Inc.
Illustration 25.5: Setting the Exchange Ratio
Illustration 25.6: Valuing A Leveraged Buyout: Congoleum Inc.

Data Sets

 

Spreadsheets

synergy.xls: This spreadsheet allows you to estimate the approximate value of synergy in a merger or acquisition.
merglbo.xls: This spreadsheet allows you to evaluate the cash flows and the value of a leveraged buyout.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How should the value of synergy be apportioned between the bidder and target firms?
Readings
  1. Synergy in Mergers
  2. The Keys to Success in M & A: The KPMG Report
  3. Stocks versus Cash Acquisitions: The Performance of Acquirers
  4. New rules on goodwill amortization
  5. CEO Egos and Big Mergers

Chapter 26: Valuing Real Estate

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 26.1: Valuing an office building
Illustration 26.2: Valuing the Equity Stake in a building
Illustration 26.3: Valuing a property based upon comparables
Illustration 26.4: Regression Approach

Data Sets

 

Spreadsheets

reval.xls: Values a income-generating real estate properties.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. How do you factor the effect of rent control into the value of a building?
  2. How do you value vacant land?
Readings
  1. A Simple Explanation of Cap Rates
  2. Operating Income in Real Estate
  3. Real Estate offers steadier returns

Chapter 27: Valuing Other Assets

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 27.1: Valuing a New York City Cab Medallion: June 1994
Illustration 27.2: Valuing a dental practice
Illustration 27.3: Valuing a five-star restaurant – Lutece in 1994
Illustration 27.4: Valuing the Copyright on “Investment Valuation”

Data Sets

 

Spreadsheets

 

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. What is the difference between valuing cash-flow generating assets and collectibles?
  2. How do you reduce the impact of the "key person" in a valuation?
Readings
  1. Art as an investment

Chapter 28: The Option to Delay and Valuation Implications

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 28.1: Valuing the Option to Delay a Project
Illustration 28.2: Valuing a Patent: Avonex in 1997
Illustration 28.3: Valuing Biogen as a firm
Illustration 28.4: Valuing an Oil Reserve
Illustration 28.5: Valuing an oil company - Gulf Oil in 1984

Data Sets

optvar.xls: Standard deviations in firm value and equity value by industry group in the United States

Spreadsheets

delay.xls: Estimate the value of an option to delay an investment.
product.xls: Estimate the value of a patent.
natres.xls: Estimate the value of an undeveloped natural resource reserve.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Why, if a patent is an option, will firms ever exercise the option (develop the patent)?
  2. When would you use option pricing to value a firm with patents?
Readings
  1. Making real options real
  2. Literature on real options in venture capital and R&D

Chapter 29: The Option to Expand and Abandon: Valuation Implications

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 29.1: Valuing an Option to Expand: Ambev and Guarana
Illustration 29.2: Considering the value of the option to expand
Illustration 29.3: Valuing Financial Flexibility at the Home Depot
Illustration 29.4: Valuing an Option to Abandon: Airbus and Lear Aircraft

Data Sets

optvar.xls: Standard deviations in firm value and equity value by industry group in the United States

Spreadsheets

expand.xls: This spreadsheet allows you to estimate the value of the option to expand a project to cover new markets or new products, using the Black-Scholes model.
abandon.xls: Estimate the value of the option to abandon an investment.
finflex.xls: Estimate the value of financial flexibility as an option.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. When does it make sense to add a premium for the option to expand?
  2. How does financial flexibility affect how much firms borrow and how much cash they hold?
Readings
  1. Real Options and Business Strategy
  2. How much is flexibility worth?
  3. Get Real
  4. Reality Check: A skeptical look at real options
  5. The Real Power of Real Options

Chapter 30: Valuing Equity in Distressed Firms

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 30.1: Valuing Equity as an Option
Illustration 30.2: Firm Value and Equity Value
Illustration 30.3: Equity Value and Volatility
Illustration 30.4: Probabilities of default and Default Spreads
Illustration 30.5: Valuing Equity as an option – Eurotunnel in 1997 (DCF valuation)

Data Sets

optvar.xls: Standard deviations in firm value and equity value by industry group in the United States

Spreadsheets

equity.xls: Estimate the value the equity in a troubled firm as an option.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. What are the implications of viewing equity as an option for vulture investing?
  2. What are the implications of viewing equity as an option for lenders to firms?
Readings
  1. Vulture Investing

Chapter 31: Value Enhancement: A Discounted Cashflow Perspective

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 31.1: Potential for value creation from divestiture: Boeing
Illustration 31.2: Operating Margin Comparisons
Illustration 31.3: Tax Burden and Valuation
Illustration 31.4: Non-Cash Working Capital and Value
Illustration 31.5: Reinvestment Rates, Return on Capital and Value
Illustration 31.6: Value Enhancement at SAP: Status Quo Value versus Restructured Value
Illustration 31.7: Value Enhancement at Blockbuster: Status Quo Value versus Restructured Value

Data Sets

cfbasics.xls: There is a dataset on the web that summarizes operating margins, tax rates and non-cash working capital as a percent of revenues by industry group for the United States.
fundgrEB.xls: There is a dataset on the web that summarizes returns on capital and reinvestment rates by industry group for the United States.
wacc.xls: There is a dataset on the web that summarizes debt ratios and costs of capital by industry group for the United States.

Spreadsheets

valenh.xls: This spreadsheet allows you to estimate the approximate effect of changing the way a firm is run on its value.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Is there a "best way" to restructure?
Readings
  1. Microsoft learning cost-cutting from GE
  2. Learning from the Super Companies
  3. Dare to keep your stock price low

Chapter 32: Value Enhancement: EVA, CFROI and Other Tools

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 32.1: Discounted Cashflow Value and Economic Value Added
Illustration 32.2: An EVA Valuation of Lululemon

Data Sets

eva.xls: Firm and Equity EVAs by industry group for the United States

Spreadsheets

fcffeva.xls: This spreadsheet allows you to convert a discounted cash flow valuation into an EVA valuation and vice versa

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Under what conditions will your estimate of firm value be the same using both EVA and DCF approaches?
Readings
  1. EVA as elixir
  2. An EVA debate

Chapter 33: Probabilistic Approaches to Valuation

Topic  Details
Overheads Download as pdf file
Illustrations

Illustration 33.1: Valuing a company facing threat of nationalization
Illustration 33.2: Valuing a company facing shifting regulatory risk
Illustration 33.3: Decision Tree Analysis: Valuing a Young Pharmaceutical Company
Illustration 33.4: Valuing an oil company: Monte Carlo Simulation (Need Crystal Ball)

Data Sets

optvar.xls: Standard deviations in firm value and equity value by industry group in the United States

Spreadsheets

bondval.xls: Estimates the value of a straight bond
convbond.xls: Estimates the value of a convertible bond

Solutions to Problems Download as pdf file
Estimation Issues and Questions  
Readings A primer on statistical distributions

Chapter 34: Overview and Conclusions

Topic  Details
Overheads Download as pdf file
Illustrations

 

Data Sets

 

Spreadsheets

model.xls: Chooses the right model to value your firm.

Solutions to Problems Download as pdf file
Estimation Issues and Questions
  1. Is there a way to blend discounted cashflow and relative valuation?
Readings  

Overheads
Topic Chapters
Introduction to Valuation Chapter 1-2
Discounted Cashflow Valuation: Estimating Inputs Chapter 3,4,6-12, 16
Discounted Cashflow Valuation: Examples Chapter 13-15, 21-23
Relative Valuation Chapters 17-20
Valuing Private Companies Chapter 24
Option Applications in Valuation Chapter 28-30
Valuing Acquisitions Chapter 25
Value Enhancement Chapter 31-32
Closing thoughts

Chapter 35

Estimation Issues and Questions

             
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